The hidden meanings of debt

Debt doesn’t seem to be just about economics, it’s also about who’s a saint and who’s a sinner.

Many observers have talked about a “morality play” when discussing the north vs. south divide in the Europe debt crisis: the prudent Germans, Dutch and Finns vs. the lazy ne’er-do-wells of Greece, Ireland, Portugal, Spain and Italy. Witness:

“It was a kind of morality play, intended to show to skeptical German voters how the Greek government intends to keep its promises to continue cutting public spending and services to meet stiff deficit requirements, despite increasing political opposition.”

“Even if those from Europe’s northern countries are right in claiming that the euro would work if effective discipline could be imposed on others (I think they are wrong), they are deluding themselves with a morality play.”

What is a morality play, anyway? As Philip Pilkington explains, the idea behind this Tudor England convention was

that it would impart wisdom to those who watched it. The common people – thought somewhat stupid by the writers – could then follow the simple moral messages purported by the playwright. It was hoped, for example, that if onlookers could see Virtue winning out on the stage against Prodigality, the citizenry would then act more virtuously and be less prodigious and greedy.

The discussion of fiscal prudence vs. fiscal profligacy in Europe does seem to have taken on a normative hue. It’s doesn’t seem to be just about economics, it’s also about who’s a saint and who’s a sinner.

Reading Debt: The First 5,000 Years, has helped me to better understand why. This excellent book is by David Graeber, the American anthropologist who Businessweek described as the “anti-leader of Occupy Wall Street.” While I hope to write a full review of his book sometime soon, I wanted to call attention to his citation of British sociologist Geoffrey Ingham. Ingham says:

In all Indo-European languages, words for “debt” are synonymous with those for “sin” or “guilt”, illustrating the links between religion, payment and the mediation of the sacred and profane realms by “money.” For example, there is a connection between money (German Geld), indemnity or sacrifice (Old English Geild), tax (Gothic Gild) and, of course, guilt.

Very intriguing. Consider this also in light of strategic default, a topic recently addressed by James Surowiecki in the New Yorker. Companies, like American Airlines, often decide to declare bankruptcy for purely economic reasons. When they do so they’re applauded by analysts for making a smart move: they can restructure their debts, renegotiate with the unions and generally get a fresh start.

By some measures over half of all U.S. mortgages are underwater– borrowers owe more on their mortgage than the house is worth. Unfortunately for many, the value of their house may never rebound to the point where this situation is reversed. But instead of following American Airlines’ example, homeowners face great moral pressure to throw good money after bad. Surowiecki:

According to one study, eighty-one per cent of Americans think it’s immoral not to pay your mortgage when you can, and the idea of default is shaped by what Brent White, a law professor at the University of Arizona, calls a discourse of “shame, guilt, and fear.” When the housing bubble burst, the banking industry was terrified by the possibility that homeowners might walk away en masse, since that would have stuck lenders with large losses and a huge number of marked-down homes. So strategic default was portrayed as the act of dishonorable deadbeats. David Walker, of the Peterson Foundation, waxed nostalgic about debtors’ prisons, and John Courson, the head of the Mortgage Bankers Association, argued that defaulters were sending the wrong message “to their family and their kids and their friends.”

Looks like it’s not just the Europeans caught up in a morality play. (For more on the obscured meanings within today’s economic debates see Ed Harrison’s recent post on code words and dog whistle economics.)

I’m beginning to think this “Economics isn’t a morality play” meme its being overplayed or at least confused with fairness and legitimacy. Certainly in the Euro area, is the average German concerned mainly about defaults on debts or more about being asked to stump up for the countries with much lower retirement ages for example. I suspect the latter.

The issue in the Eurozone is one of democratic legitimacy, without which fiscal union and in turn monetary union are not possible.

Anonymous says 7 years ago

Economics has been corrupted for thirty years and we are now seeing the end throes of the current economics consensus. That is why we will have repeated QE while the economy collapses. Neoclassical economics is blocking Keynesian stimulus so There is immense amount of political claptrap being spouted to justify one position or another. Greece was a basket case but not for the reasons that the Germans mentioned. The greeks were called lazy when they worked longer than germans. The problem was that the government accounts were a mess but nothing was done about them. They are still not dealing with them properly. The rich are still avoiding taxes in Greece. Germany like to think that they have been sensible and saved and gone through the pains of structural reforms and feel that others should also go through the same tribulations that they experienced. They are partially right. Structural reforms elsewhere are needed but their banks have been the main beneficiaries of the bail outs. Once the defaults start the cracks in the german banks will be exposed. The recent concerns over Germany’s Commerz bank will not be the last.

I agree with you on both Greece and Germany, the crux of my point is that the “Economics isn’t a morality play” critic lacks the nuances you point out. And that nuance goes much deeper than surplus good, debt bad. Behind the “Germany like to think they have been sensible…” thinking is an an identity, a political and financial culture which – like most every other country – they’ve fought for and grown up with. They are now being asked to compromise on this identity with, for example, the “basket case” one of Greece, through the mechanism of either fiscal or debt union. This may indeed be in their long term Economic interest however It’s a folly to ignore this political/democratic dimension simply because “Economics isn’t a morality play” and its ignoring it that led to the tensions Europe now faces in dealing with the broken system of monetary union.

On Neoclassical economics, my views have been shaped by Steve Keen, fundamentally that school of thought seems to be broken from the ground up. On the Keynesianism point, I go from agreeing with your position to disagreeing with it on a daily basis. I think fundamentally I agree with it however the problem I have with Keynesianism is again the political reality of it in practice. Counter cyclical policy needs to be practiced in a symmetric manner for it to work over the long term, however the incentive structure for politicians is anything but symmetric.

Anonymous says 7 years ago

The issue about debt is that some debt is essential. Without enough government debt how do private pension funds make adequate provision for pensions? It is the long dated debt that pension funds use to provide the incomes for pensions.

As for governments borrowing to invest that is also very good, but the last UK Labour government botched the process by creating long term off balance sheet items that were more expensive for the tax payers than simply selling bonds to pay for it. These costs will be a burden on the UK tax payer for thirty years. If you do borrow to invest you need to ensure that the rate of return is greater than the cost of funds. Though with the way government departments calculated that it was never sure if any investment was justified.

As for the problem of Greece, yes fiscal transfers are necessary, but I cannot see the Germans allowing that when they have already criticised the Greeks so much so that the transfers will look like throwing money down the drain.

I totally agree with you on the ending of Neoclassical economics and maybe this crisis will ensure that destruction. The problem is that many politicians bought into the emperors new clothes and hate to look like fools now that the emperor is naked. Hence so much extend and pretend everywhere.

As for Keynes, I think that stimulus should be applied at the end of the debt clear out, just as in the thirties. What we had in 2008 was badly designed fake stimulus which only kept the old economic model going that little bit longer. It delayed the debt clear out and keeps the economy weak.

Until then governments need to have adequate provision for unemployment and retraining until the debt clear out is complete. I know that is a very Austrian position but I see lots of merit in Minsky, Hayek and Schumpeter in clearing out the dead wood before you start stimulus.

I will agree with you about the counter cyclical element of Keynesian policy, but that is a failure in politics not Keynes. Keynes and MInsky both supported counter cyclical policy to stop bubbles. No government wants to end the party especially when it brings in extra tax revenue that enables the government to bribe the electorate at the next election. Throughout the last UK Labour government the Conservatives had no disagreements on policy even agreeing to maintain spending if they were elected, so really maintaining the same policy. It was only as the crisis unfolded that they disagreed over how much to cut. The differences are still tiny, yet just enough to say that Labour were fiscally irresponsible as if a fraction of a percent made the difference. So while Labour may have been spending the Conservatives would not have changed anything. So the Coalition are as irresponsible now as Labour were then. So to say that Keynesian policy is unworkable is as wrong as saying markets are rational and have perfect knowledge. Goldman Sachs made fortunes on that lack of knowledge.

One thing that I always felt was essential was small regular recessions to clear out debt wood in the economy and to stop bubbles inflating. Though central banks now have stopped this regular cleansing cycle so now we are having to experience the equivalent of all those recessions chores in one depression. That is why I think the Fed should stripped of its function to maintain full employment as that is only really addressed by fiscal measures anyway.

David_Lazarus says 7 years ago

The issue about debt is that some debt is essential. Without enough government debt how do private pension funds make adequate provision for pensions? It is the long dated debt that pension funds use to provide the incomes for pensions.

As for governments borrowing to invest that is also very good, but the last UK Labour government botched the process by creating long term off balance sheet items that were more expensive for the tax payers than simply selling bonds to pay for it. These costs will be a burden on the UK tax payer for thirty years. If you do borrow to invest you need to ensure that the rate of return is greater than the cost of funds. Though with the way government departments calculated that it was never sure if any investment was justified.

As for the problem of Greece, yes fiscal transfers are necessary, but I cannot see the Germans allowing that when they have already criticised the Greeks so much so that the transfers will look like throwing money down the drain.

I totally agree with you on the ending of Neoclassical economics and maybe this crisis will ensure that destruction. The problem is that many politicians bought into the emperors new clothes and hate to look like fools now that the emperor is naked. Hence so much extend and pretend everywhere.

As for Keynes, I think that stimulus should be applied at the end of the debt clear out, just as in the thirties. What we had in 2008 was badly designed fake stimulus which only kept the old economic model going that little bit longer. It delayed the debt clear out and keeps the economy weak.

Until then governments need to have adequate provision for unemployment and retraining until the debt clear out is complete. I know that is a very Austrian position but I see lots of merit in Minsky, Hayek and Schumpeter in clearing out the dead wood before you start stimulus.

I will agree with you about the counter cyclical element of Keynesian policy, but that is a failure in politics not Keynes. Keynes and MInsky both supported counter cyclical policy to stop bubbles. No government wants to end the party especially when it brings in extra tax revenue that enables the government to bribe the electorate at the next election. Throughout the last UK Labour government the Conservatives had no disagreements on policy even agreeing to maintain spending if they were elected, so really maintaining the same policy. It was only as the crisis unfolded that they disagreed over how much to cut. The differences are still tiny, yet just enough to say that Labour were fiscally irresponsible as if a fraction of a percent made the difference. So while Labour may have been spending the Conservatives would not have changed anything. So the Coalition are as irresponsible now as Labour were then. So to say that Keynesian policy is unworkable is as wrong as saying markets are rational and have perfect knowledge. Goldman Sachs made fortunes on that lack of knowledge.

One thing that I always felt was essential was small regular recessions to clear out debt wood in the economy and to stop bubbles inflating. Though central banks now have stopped this regular cleansing cycle so now we are having to experience the equivalent of all those recessions chores in one depression. That is why I think the Fed should stripped of its function to maintain full employment as that is only really addressed by fiscal measures anyway.

The first 5000 years of debt have also been characterized by turmoil, stemming from humans so misunderstanding how “be fruitful and multiply” that adds to wealth by %’s, becomes naturally unmanageable. In our economy we sought to stabilize perpetual multiplication, putting money in to take ever more our, as evidence of our still misunderstanding it.

Where “stabilizing” that naturally ends in causing the collapse of the environment that had been so generous. Using what you’ve taken from nature to take ever more is how most anything starts up, but can only be temporary. What “ruins” it is naturally invisible to us, the hidden relationships of the economic environment that are pushed to exhaustion, as we see all over the place today.

Even Keynes wrote about that as a necessary limit of economic growth in a free market economic system. He devoted a whole chapter in his book to it, as you can find explained searching my site for it [site:synapse9.com Keynes]. What solves it comes to a very simple principle. Not long after you find it to fruitful and multiply, you find it still more fruitful to wisely give away. The way the math works even vast waves of “strategic” defaults don’t correct the problem, as ever growing scales of defaults are needed…

The people of the Bible certainly could have observed the same thing, just from their daily experience, as could observers of the long history of financial panics ever since. It’s been a principle of nurture forever, don’t over-invest, don’t over-plant. It’s now becoming understood from the physics of natural systems, why so very much of what nature needs to operate is hidden from view.

Successful systems all do begin with multiplying returns, but to survive their profits need to be well spent.

The first 5000 years of debt have also been characterized by turmoil, stemming from humans so misunderstanding how “be fruitful and multiply” to accumulate wealth by %’s, becomes naturally unmanageable. In our economy we sought to stabilize growing wealth, putting money into the creativity of our communities to take exponentially more out, as clear evidence of our still misunderstanding it. Where “stabilizing” that naturally ends in causing the collapse of the environment that had been so generous. Using what you’ve taken from nature as leverage to take ever more is how most anything starts up, but can only be temporary. What “ruins” it is naturally invisible to us, the hidden relationships of the economic environment that are pushed to exhaustion, as we see all over the world today. Even Keynes wrote about that as a necessary limit of economic growth in a free market economy. He devoted a whole chapter in his book to it, as you can find explained searching my site for: [site:synapse9.com Keynes]. What solves it comes to a very simple principle. Not long after you find it to fruitful and multiply, you find it still more fruitful to wisely give away. It’s a natural cycle, inherent in how nature works. Even vast waves of “strategic” defaults wouldn’t correct the financial problem today, as ever growing scales of “strategic defaults” would become needed…The people of the Bible certainly could have observed the same thing, just from their daily experience, as could observers of the long history of financial panics ever since. It’s been a principle of nurture forever, don’t over-invest, don’t over-plant. It’s now becoming understood from the physics of natural systems, why so very much of how nature operates remains quite hidden from view. Successful systems all do begin with multiplying returns, but to survive their profits need to be well spent.

“If you do borrow to invest you need to ensure that the rate of return is greater than the cost of funds.”

Agreed.

“As for the problem of Greece, yes fiscal transfers are necessary, but I
cannot see the Germans allowing that when they have already criticised
the Greeks so much so that the transfers will look like throwing money
down the drain.”

Again let me reiterate my point about “Economics isn’t a morality play”. A much more useful statement would be “Economics isn’t a morality play but neither is it the whole picture”. Given both the undemocratic evolution of European politics combined with a dysfunctional neoclassically dominated politico-financial elite we’ve ended up with a system of monetary union without fiscal union. Given that fiscal union is required for a working monetary union and give that a requirement of fiscal union is a functioning democratic union then there’s are only two explanations for ending up here – either the elite understood fiscal/democratic union would be necessary and thought they could get the democratic support when the time came, or they just didn’t understand the economics. But we’re now here and it’s crunch time and that support (never there is the first place) hasn’t arrived. For folks to start throwing “Economics isn’t a morality play” at the Germans is missing the point, they never signed up for fiscal union in the first place.

“As for Keynes, I think that stimulus should be applied at the end of the
debt clear out, just as in the thirties. What we had in 2008 was badly
designed fake stimulus which only kept the old economic model going that
little bit longer. It delayed the debt clear out and keeps the economy
weak. ”

“Until then governments need to have adequate provision for unemployment
and retraining until the debt clear out is complete. I know that is a
very Austrian position but I see lots of merit in Minsky, Hayek and
Schumpeter in clearing out the dead wood before you start stimulus.”

Definitely agree.

On the issue of the rights and wrongs of the Conservatives vs Labour, I’ve no opinion they’re just great examples of how the political reality can interfere with good economic policy and why I think “Keyesianism” will always fail over the long run – it’s never actually practiced. That said I don’t discount it as being the least worst option.

“One thing that I always felt was essential was small regular recessions
to clear out debt wood in the economy and to stop bubbles inflating.
Though central banks now have stopped this regular cleansing cycle so
now we are having to experience the equivalent of all those recessions
chores in one depression. That is why I think the Fed should stripped of
its function to maintain full employment as that is only really
addressed by fiscal measures anyway. ”

Agreed, IMHO the current predicament hasn’t been caused in the main by government fiscal policy but government monetary policy (and regulation). When ever the economy looked shaky CBs just reduced rates, combine this with a private sector banking system incentivised to create debt for the purposes of speculation then is it suprising we got the malinvestment bubble that is now trying to pop.

Anonymous says 7 years ago

I understand your point about the morality of economics or lack of to be more accurate. Though I would still support such measures such as fiscal transfers as the consequences are worse. A civil war in Greece or even a revolution will destabilise all its neighbours and they collectively make up a sizeable market.

As for Keynesian policies failing, that does depend if you design them badly as in the US recently. Leakage is a potential problem but if designed well it minimises that risk. I am still very supportive of Keynesian policies but they have to be done properly not called Keynesian because it is simply spending money.

As for interest rates I prefer a cap and collar for rates that stop them getting too low and too high. If interest rates are at these bounds then governments have to counter with tax increases or cuts to maintain demand in a counter cyclical system. That will reduce the stimulus to housing bubbles. Though Central banks should also control the total level of debt in the economy. If that had been done, we would not have a housing bubble in the UK and the risks of defaults would be considerably lower as banks would not be at risk.